Credit scores | Important credit score information you need to know
It’s very important you know about Credit Scores so that you can possibly avoid some mistakes in the future. Knowledge about credit score is very important mostly when you need to take some critical financial decisions in your life.
Majority of people in the US would rather disclose other personal information but not to disclose their credit score. Most people can’t really understand what works for them in improving their credit scores.
Most times the reverse is the case that what you thought will increase your credit score won’t either. Sometimes, what you think won’t increase it goes on to increase your credit score. You really need to take some time to understand how credit scores work so that you can build a strong one to help you save more money.
What’s Credit Score?
Simply, credit score is that which shows your creditworthiness. It’s proof that a person can or will be able to pay his or her debts. It’s your credit scores that financial institutions or individuals use to check their risk in lending you money.
Therefore, for any person to lend you money, they’ll, first of all, check your credit score. Even your Landlord and any person you’re doing business with, depending on your credit scores to know your trustworthiness in transactions.
A credit score is just 3 digit figures that show the potential of your borrowing and paying back. The higher your credit score, the more trustworthy your creditors consider you. If you have a poor credit score, it means that you’ll pay high interest on credit cards if any card issuer approves you.
Also, you might be denied of that thing you want to buy or hire a person with more credit value. However, if you have a high credit score, it means that you’ll be borrowing at low rates.
Different between Credit score and Credit Report
Credit report involves your personal and financial details compiled together to produce your credit report. It contains information such as your name, Address, social security number, closed credit card accounts, loans, liens, bills in collections and your bankruptcies.
In the U.S, you’re entitled to a free credit report collected by the 3 major credit bureaus (Experian, Equifax, and TransUnion) every year. You can get it from the only federal authorize platform-AnnualCreditReport.com.
However, it’s this based on this report that the credit bureaus will now calculate your credit scores. After this, they now share it to the banks, individuals like your business partners and your Landlords and other financial institutions. Because of the multiple credit bureaus, you’ll get more than one credit report and credit score.
Types of Credit scores
There’re different types of credit scores. Though, they are not all the same or equal. In the U.S, FICO ( Fair Isaac Corp)a data analytics company provides the credit scores for the 3 major credit bureaus. FICO is the biggest and the highest source of credit score information. They produce your credit scores based on what your credit report says. Under FICO, they use different types of credit scores for different purposes. For instance, you won’t use the same credit score for a mortgage application and a credit card application.
How to calculate Credit Score
It’s seen as a mystery till now on how a credit score is calculated. This is because each of the agency uses its algorithm. But the most common one is the FICO Model which is based on the Five major credit score factors which are :
- The Payment History (35%): Paying your bills one time is seen as the first thing to consider in FICO score. It accounts for more than a third of factors in deciding your credit score
- The amount you owe as debt (30%): The total debt you owe in comparison with the total available credit remains another important factor in the FICO score.
- The Length of Credit History (15%): Those who want to lend you money would like to know how long you’ve been in this credit So, the longer you’re in the history, the better your chances of consideration.
- Credit Mix (10%): This involves how diversified your accounts are. The more diversified the better for you. It means that you can manage a variety of debts like credit cards, mortgage, student loans and so on.
- New Credit (10%): If you’ve too many new accounts in a short while, it’ll send a red alert that you’d been trying to keep up with some bills. Therefore, if you are rejected for a credit card, don’t just apply elsewhere immediately. Wait a while for some months before you go back to apply again.
- In addition, if you’re rate shopping for a student loan or a home, auto, do all of it within 45 days. This will enable them to treat them all as one. So, you don’t have to be opening new accounts every now and then because of the 10% negative effect.
Credit score Ranges
Below are what constitutes good or bad score ranges using the FICO standard:
- 800 and above- is Exceptional
- 740-799-is Very Good
- 670-739-is Good
- 580-669 –is Fair
- 579 and below is Poor
According to FICO, Americans have their national average FICO Credit Score above 700.
How To Achieve An Excellent Credit Scores
- Pay your bills on time
- Ensure your credit utilization is under 30%
- Start building your credit early by using credit card early.
- Try diversifying your credit card
- Reduce opening new accounts in a short period later than six months.